Do Balance Transfers Hurt Your Credit Score?

Balance transfers allow individuals to move high-interest debt from one credit card to another, often with a lower introductory interest rate. This strategy aims to simplify debt management and reduce borrowing costs. Understanding how these transfers influence credit scores is important for anyone considering such a move.

Impact on New Credit Inquiries and Accounts

Applying for a new credit card for a balance transfer triggers a hard inquiry on a credit report. This inquiry remains on a credit report for up to two years, but its effect on credit scores is temporary and minor, typically impacting scores for about 12 months. A single hard inquiry can reduce a credit score by fewer than five points.

Opening a new credit account also influences the average age of all credit accounts. Credit scoring models consider the length of an individual’s credit history, with a longer history viewed more favorably. When a new account is opened, it can decrease the average age of all accounts, leading to a short-term dip in the credit score. This factor, known as “length of credit history,” accounts for about 15% of a FICO Score.

Impact on Credit Utilization

Credit utilization is a factor in credit scoring, representing the amount of revolving credit used compared to total available credit. This ratio is calculated by dividing total outstanding credit card balances by total credit limits across all revolving accounts. A lower credit utilization ratio is beneficial for credit scores, with experts recommending keeping it below 30%. This factor accounts for approximately 30% of a FICO Score.

A balance transfer can positively impact credit utilization if high-balance debt is moved to a new card with a substantial credit limit, especially if the original card’s balance is paid to zero. This action can lower the overall utilization ratio. Conversely, the impact could be negative if the new balance transfer card is quickly maxed out and the old card is not paid off, or if new charges are made on the old card. Such scenarios can lead to higher overall credit utilization, harming the credit score.

Impact on Payment History and Debt Management

Payment history holds the most weight in credit scoring, accounting for about 35% of a FICO Score. Making timely payments on the new balance transfer card is important for maintaining or improving a credit score. Consistent, on-time payments demonstrate responsible credit management and contribute positively to an individual’s credit profile.

Conversely, missing payments on the new balance transfer card, or any other credit account, can negatively impact a credit score. A payment reported as 30 days or more past due can appear on a credit report and remain there for up to seven years from the date of initial delinquency. The severity of the negative impact depends on how overdue the payment becomes and the individual’s credit standing prior to the missed payment. Furthermore, if the original card from which the balance was transferred continues to be used and accrue new debt, it can undermine the benefits of the balance transfer. This can lead to increased overall debt and a higher credit utilization ratio across accounts, negatively affecting the credit score despite the initial transfer.